Welcome to Part 2 of our article on foreign lenders. Here is a piece of brief information for you; this is a two-part article that will give you in-depth information on all the parameters that need to be considered while comparing the foreigneducation loan policies of Indian lenders to those of foreign lenders. As this part is a continuation of the previous post, we recommend that you read part 1 first. Let’s revisit some of the drawbacks discussed in Part 1 before giving you a glimpse into those covered in this part. In part 1, a detailed explanation of the drawbacks of borrowing education loans through international student loan lenders like the Prodigy Finance foreign education loan and those of Mpower finance were covered. Some of the crucial points like the Processing fees, interest rates, and the income tax exemptionwhich is applicable only to Indian students, were discussed. The terms and conditions of the Prodigy finance foreign education loan schemes and those of MPower Finance have been discussed in Part 1.

Now that you are familiar with most of the drawbacks that were explained in detail in Part 1 of this article, here is what Part 2 has in store for you. Out of the many drawbacks that must be considered as comparison points, the most important drawback of all happens to be Interest Rate Parity. This is the major drawback that plays a crucial role in helping students determine the right lender of an abroad education loan. More often than not, loan applicants happen to miss out on this very important point.

Or better yet, you can watch for yourself, the major points that are going to be discussed here, by going through Part 2 of the 10th episode of Loanflix, which is a web-series curated by our team for students like you. Click on the below video to hear all about it from our experts.

In this part, we explain why the interest rates applied to loan amounts taken in two different currencies cannot be compared to one another. This is done with the help of multiple examples. Another major factor that will help you decide on a lending institution is the loan margin and the maximum loan amount limit offered by Prodigy finance foreign education loan and also those of MPower finance. And finally, under what circumstances should you apply for an abroad education loan through a foreign lender? The answer to this question is also explained elaborately towards the end of this article. Let’s look at the first and the most important factor, Interest Rate Parity.

Drawback 4: Interest Rate Parity

Interest Rate Parity basically means that one cannot compare the interest rates of Indian banks/NBFCs to that of foreign lenders.

Foreign money lenders generally lend loan in USD.

An interest rate of 10%, applied on a depreciating currency like the INR, is not the same as a 10% interest rate applied on an appreciating currency like the USD.

The thumb rule is that 10 % interest rate of a loan amount borrowed in the USD currency is equivalent to approximately a 15% interest rate on a loan amount borrowed in the INR currency. In other words, a 10% interest rate on an INR loan is equivalent to only 5-6% interest rate if the loan amount is in USD.

To understand the fluctuation in currency values over the years, refer to the table given below. The below table shows the INR equivalent of the USD over the years mentioned in the above case.

Month & Year

USD

INR

July 2011

1 USD

INR 44

January 2014

1 USD

INR 62

December 2016

1 USD

INR 69

To understand this factor, let us consider the following example.

Let’s assume that a student who went for his/her higher education in the US, in July 2011, took an education loan of Rs. 44 lakhs ( i.e, $100,000). In the above table, you can see that in July 2011, 1 USD is equivalent to INR 44.

Moving ahead, let’s assume that the course got over in July 2013, and consider the student’s loan repayment holiday to be 6 months after the course completion, i.e, January 2014. So the total moratorium periodis 30 months, i.e 2.5 years. The student is expected to start repaying his loan from January 2014. Let’s take a look at the values of INR and USD from July 2011 to January 2014 as given in the table.

In July 2011, 1 USD = 44 INR and In January 2014, 1 USD= 62 INR. Now let’s assume that the student takes roughly 3 years to repay the full loan amount, i.e, the student would finish repaying his loan in December 2016. By this time, the value of INR has depreciated further to 1 USD = INR 69. Keeping this information in mind, let us consider 2 different scenarios to understand how Interest rate parity affects the final loan amount to be repaid by the student.

Scenario 1: The student has borrowed a loan from a foreign lender & paying back in USD.

Now, this scenario has two possibilities, After the course ends;

a. The student stays in the US and pays back the loan amount in the USD

Assume that the student has borrowed a loan of USD 100,000 in July 2011 through Prodigy finance foreign education loan scheme. He/she is employed in the US after the course and is paying back the loan amount in USD. The following calculations are applicable in such a case.

Borrowed Amount: USD 100,000

Interest rate ( APR including LIBOR): 10 % p.a.

The accumulated interest amount to be repaid in January 2014 (end of moratorium period), i.e 30 months: $ 25,000.

b.The student comes back to India and starts repaying the loan amount in USD.

This is the worst-case scenario. If a candidate is earning in a depreciating currency like the INR, paying back the loan amount in USD will cost him/her a lot of money. According to the above estimation, the student is expected to pay back Rs. 81 Lakhs when you convert the borrowed loan amount into INR. Hence, the total loan amount would increase by 2x.

Scenario 2: Student borrows education loan from an Indian bank (specifically a nationalized bank). Again, there are two possibilities:

a. He/She is employed in the US and has to repay the loan amount in INR.

Now, if the same student borrows the same amount, i.e. Rs. 44 Lakhs, which comes to $ 100K (according to currency values in July 2011), from an Indian bank/NBFC, the total amount to be paid back would come to approximately $ 85,000 when converted into USD. As the candidate has to pay back in INR and in this case, he/she is earning in USD, they are at an advantage. How? Let’s see;

This is because when a 10% interest rate is applied on Rs. 44 Lakhs for 30 months (moratorium period), the amount to be paid as interest comes to Rs. 11 Lakhs.

So, the total loan amount = Principal amount (Rs. 44 Lakhs) + Simple interest rate (10% p.a) for a period of 2.5 years.

In January 2014, The total loan amount to be repaid by the student comes to Rs.55 Lakhs.

When you convert Rs.55 lakhs to USD according to currency rates in January 2014, the total repayable amount comes to $84,615 which is far less in comparison to the $125,000 that the student would pay if he borrows through Prodigy finance foreign education loan.

This is exactly what we wanted to exhibit when we said that interest rates in two different currencies cannot be compared. This is how interest rate parity affects the total loan amount to be repaid in this case.

b. The student finds a job in India and repays the student loan in INR

If the student decides to come back to India for work, he has to pay a far lesser amount as loan. Let’s see how.

According to the calculation done in the first possibility, when he/she borrows a loan of Rs. 44 Lakhs from an Indian bank/NBFC, at an interest rate of 10% p.a., the total interest amount to be paid after the moratorium period ends, will come to Rs. 11 Lakhs. And the total loan would again amount to Rs. 55 Lakhs. The student can still afford to pay back this amount within the stipulated time, depending on his annual pay.

Also, this is a more favorable scenario for the student as he/she can avail all the education loan subsidies/exemptions that is applicable only to Indian students.

So, from both the above situations, we can understand that either way, borrowing abroad education loan from an Indian lender is way more beneficial for Indian students as compared to borrowing the same loan amount from a foreign lender.

Fact: The INR had an average depreciation of 4.7% over the last decade and is expected to continue at the same annual rate over the next decade. For a student who has borrowed an education loan in 2019 from an Indian bank/NBFC, and is supposed to pay back the loan amount in 2025, the same calculation is applicable for the repayable loan amount. Please note that all the USD-INR conversion data are real figures from the XE currency chart for last 10 yrs. The above examples are based on the currency rates of 2016.

Current Scenario

Now, let us try to understand the effect of interest rate parity with the help of an example in the current scenario, i.e. if you are a student who is planning to apply for an education loan this fall, you might relate to the following scenario better.

For example, you apply for a loan amount of Rs. 70 Lakhs from an Indian lender like SBI, or an amount of $100 K from a student loan scheme like the Prodigy finance foreign education loan in July 2019.

Your father’s income is INR 8 Lakhs per annum which means that when you borrow the loanfrom an Indian lender, you are eligible for an exemption of 20% of your interest amount of an education loan, according to Section 80 E of the Income Tax Act.

The interest rate in both cases is 10% p.a.

Your moratorium period ends in January 2022 (30 months) when 1 USD ≈ INR 85 and your loan repayment period is estimated to be over by January 2025 (6 years after the course) when 1 USD ≈ INR 95.

The average increase in currency rates is estimated to be INR 90 over a period of three years (2022-2025).

Please take note of these timelines, as they are important to understanding the difference in both the currency rates through these 3 years, i.e. 2022-2025. Also, you may refer to the below tables to know the estimated LIBOR and MCLR rates for the respective years. A table showing the annual taxable income and their respective tax exemption percentages are given below to help you calculate the tax benefit.

Annual Income Tax exemption table (Section 80 E)

Annual taxable income (in Lakhs)

Tax exemption on the payable interest

Up to 5

10%

5-10

20%

10+

30%

LIBOR Rates:

LIBOR (USD)

Year

LIBOR rate

2014

0.5%

2018

2.3%

2019

2.8% (now)

2021*

3.8% (forecast)

MCLR Rates:

SBI MCLR (INR)

Year

MCLR rate

2011

8%

2019

8.55% (now)

2021*

8.67% (forecast)

Now, considering the above details, and after referring to the table given above, below is an estimate of the total loan amount that will be paid by you in January 2025.

Loan margin is something that you must add to your checklist while deciding on the right lender for an international education loan.

For instance, the maximum loan amount offered by an international education loan lender like MPower finance is $25,000. This amount is approved under certain conditions only.

Even if they approve the maximum loan amount, it is not enough to cover your expenses. Generally, I-20 amount states $40,000 to $50,000 a year as fees.

On the other hand, Prodigy finance foreign education loan schemes offer to cover about 100% of your expenses. However, this is subject to certain conditions. Factors like an applicant’s employability potential, the university/institution to which the applicant has applied, the chosen course, etc. are considered for Prodigy finance foreign education loan.

In most cases, Prodigy finance foreign education loan schemes have provided a 65% coverage of total expenses. They approve a 100% expense coverage only in rare cases.

Now the major glitch here, which a lot of students are not aware of, is that before disbursing this 65% loan amount, Prodigy finance requires a loan applicant to show proof of the remaining 35% of the amount in their bank account.

Coming to the loan margin requirements of Indian lending institutions, a public bank in India, offers an applicant a 90-100% coverage of their total expenses. This is approved depending on the value of the collateral security provided by the loan applicant.

When should you approach a Foreign Lender?

This question is the most prevalent amongst the loan applicants who come to WeMakeScholars. Sometimes, students have certain misconceptions about Indian banks/NBFCs. In order to avoid certain procedures, they tend to apply through the Prodigy finance foreign education loan scheme or MPower finance education loans. In such conditions, here are a few recommendations given by us to them.

Case 1:You have collateral that has good market value, and you have a co-applicant who has a decent income profile (including pensioners/ rental income/ sibling’s income are considered). We recommend such applicants to apply to any Indian public banks in such a case.

Case 2:The applicant has no valuable collateraland has tried every possible alternative to secure one. In such conditions, we recommend non-collateral education loan options by Indian public banks and NBFCs, for which, the co-applicants (parents, relatives, siblings) profile is given importance.

Case 3: The applicant has no valuable collateral, and a co-applicant is nowhere in the picture/ is deemed not eligible by most banks because of unpaid EMIs, cheque bounces, etc. Such applicants are not eligible to apply for foreign education loans in India. In such rare cases, we recommend the applicant to apply through an international lending scheme like the Prodigy finance foreign education loan. Although he/she would end up paying a much larger amount as a loan, at least their dream of studying abroad will be saved.

From the above cases, you may observe that we recommend applying to schemes like the Prodigy finance foreign education loan, or MPower finance, as a last resort to candidates who are in a situation similar to case 3. If you are not, we recommend you to consider applying to Indian banks/NBFCs.

I would like to conclude this article with a small note. A foreign education loan is not something to be taken lightly, taking a well-informed decision regarding the same will help you save on a lot of money down the line. In fact, you can gift something substantial to your parents with the savings!

Note: WeMakeScholars is an organization funded and supported by the Government of India that focuses on International Education finance. We are associated with 10+ public/Pvt banks/ NBFCs in India and help you get the best abroad education loan matching your profile. As this initiative is under the Digital India campaign, it is free of cost. The organization has vast experience dealing with students going to various abroad education destinations like the US,Canada,UK,Australia,Germany,Sweden,Italy,China,France among others.